The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.

The Outreach and Education function engages, empowers and educates the Second District communities that the Bank serves, especially civic leaders, students, educators, small business owners, policymakers and the general public. It furthers the Bank's commitment to the region by listening to the communities we serve and leveraging our unique attributes to positively impact school and university programs, as well as analysis and research.

At the Federal Reserve Bank of New York, we are proud that Puerto Rico is part of the Second District, which we represent in the Federal Reserve System. We have a deep commitment to the people of Puerto Rico and to the future growth and prosperity of the Commonwealth. Our commitment is reflected in the ongoing work of our Outreach and Education teams with our many partners on the Island, and in the research conducted by our economists, who monitor local economic conditions and analyze issues that affect the Island’s economy.

Where Puerto Rico Stands

Economic activity in Puerto Rico remains generally flat at a depressed level and there are no strong signs that a meaningful recovery is taking hold. Recently, serious fiscal challenges have surfaced that are closely interrelated with the Island’s weak economic performance. In light of the rising fiscal pressures Puerto Rico faces, the Federal Reserve Bank of New York has undertaken this update of an earlier report that examined the competitiveness of the Island’s economy.

Challenges

In 2012, we highlighted some of the key challenges facing Puerto Rico’s economy. In this report, we revisit each of these challenges and discuss the progress made in several areas:

Improving Labor Market Opportunities

Developing Human Capital

Reducing the Costs of Doing Business

Mobilizing Finance for Business Development and Growth

Reducing Dependence on a Shrinking Industry

Fiscal Developments

In this report, we discuss the outlook for the sustainability of Puerto Rico’s debt and outline recent Commonwealth efforts to strengthen the Island’s public finances:

Rising Debt Levels and Market Access Concerns

Effects of Stress in Puerto Rico on Financial Markets

Government Efforts to Strengthen Public Finances

Steps toward Fiscal Sustainability

Puerto Rico has an opportunity to restore its fiscal health, but it needs to act. In the spirit of assisting the Commonwealth in this endeavor, we describe the steps required to improve fiscal outcomes and restore access to low-cost credit:

Adopt a capital budget and a binding balanced-budget rule for the central government

Adopt a legislative framework requiring multiyear budgeting, specific fiscal targets, and monitoring mechanisms to help ensure that targets are met

Key Data Points

Unemployment Rate - May 2014

13.8%

Puerto Rico

6.3%

United States

Real GNP Growth Rate - 2013

0.3%

Puerto Rico

1.9%

United States

Puerto Rico's Total Government
Debt-to-Income Ratio

2000

58.8%

2006

74.6%

2012

101.8%

Authors

This report was prepared by the project team of Jaison Abel, Jason Bram, Richard Deitz, Andrew Haughwout, Thomas Klitgaard, and James Orr of the Research and Statistics Group; Hunter Clark, Tricia Kissinger, Jonathan Landesman, and Monica Sanz of the Emerging Markets and International Affairs Group; Rae Rosen and Javier Silva of the Communications Group; and Akash Kanojia of the Markets Group. The views expressed in this report are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of New York or the Federal Reserve System.